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Types of options in stock market
The investors in the stock market who have been trading into options should know the types of options in stock market. Investors usually use two types of options in stock market; (1) call option and (2) put option.
You cannot start trading in options without having proper knowledge about these concepts.
If you have just started trading in options and have traded in the call and put options, you need to learn more about the basics of both of these concepts. Even the investors who regularly use both options are ambiguous about the call and put options. The reason for this is they do not have a basic understanding of the concept.
If the investors do not know about the concept, they would struggle to understand advanced options trading or will face problems going forward with the option trade with limited knowledge.
Call and Put are the two major options for trade, but apart from this, there are many other options that the investors need to know if they are going to use them.
Options and types of options in stock market are known as derivatives because the price of a call or put option is derived from the value of an underlying asset.
Let us understand this with a simple example,
Suppose there is a company XYZ and you are dealing with the option of stock of that same company. The price of an option will be derived from the underlying stock of XYZ company; hence they are known as derivatives. Here, the options give you the right to sell a particular contract at a specific price, also known as the strike price, before expiry on a certain future date. The expiry date here is the termination date of the contracts.
The contracts are classified on the basis of various methods such as how they are traded what is the expiration cycle, and what are the underlying assets.
Let us see the list of various options trading categories in stock market.
Call
Puts
American Style
European Style
Exchange Trade Options
Over the Counter Options
Option trade by Expiration
Option type by the Underlying Security
Employee Stock Exchange
Cash Settled Options
Exotic Options
The above options trading categories in stock market will be used when they are required under the right circumstances. But, you need to learn more about the Call and Put options which are more popularly used in the Indian stock market.
Types of Options Strategies
By choosing the types of options strategies, you can maximize your profit and reduce the risk to a minimum. If you have an idea about the types of options strategies, then options trading will become quite easy to practice.
The types of options strategies you need to know about are as follows,
1. Bull Call Spread:
In Bull Call Spread, the investors sell the numbers of shares at a higher price at the same time as buying the same calls at a specific strike price with the same expiry and the same underlying assets. Investors expect a moderate rise in the underlying asset's price, so they are bullish and use this strategy to minimize the net premium they spend. It is a type of vertical spread strategy in the stock market.
2. Bear Put Spread:
This is a great strategy through which the investors buy put options at a specific strike price. The investors simultaneously sell an equal number of put options at a lower strike price. The investors, with the bear put spread option strategy, can limit gains and losses when they are bearish and feel that the underlying asset's price will decline. This strategy is also one of the vertical spread strategies.
3. Long Strangle:
Investors buy options OTM (Out of The Money) Put and OTM Call at different strike prices having the same expiry date. The investors who think that the prices will rise or fall substantially go for this strategy.
4. Long Straddle:
The investors use this strategy by buying put and call options at the same time of the same underlying assets having the same strike price and expiry. This strategy, in theory, is chosen for unlimited gains.
5. Long Call Butterfly Spread:
In this strategy, the investors use the combination of bear spread and bull spread. Usually, the investors use two different contracts to buy, but here, they can buy up to three strikes prices that are different from each other.
6. Married Put:
In Married Put, the investors buy stock shares, and at the same time, they buy put options with the same number of shares. When the investors have the stock on hold, then there is a downside risk involved. This strategy aims to protect investors' stock against this downside risk.
7. Covered Call:
A covered call helps investors buy underlying stocks and sell a call option at the same time on the same shares. It would help if you sold the shares at the strike price.
8. Iron Butterfly:
With an intention to buy OTM Put, the investor will sell ATM (At The Money) Put and simultaneously selling ATM Call for OTM Call with all having same expiry and same underlying assets. This strategy offers profit or income on non-volatile stocks.
9. Iron Condor:
Investors sell an OTM option buying simultaneous OTM put with a lower strike price. Here the investors hold both bull call spread and bull put spread.
10. Protective Collar:
Investors buy OTM put option for this strategy and sell OTM call option at the same time. This strategy helps in locking the sale price.
Types of stock options trading
There are two types of stock options trading that are the most preferable in the Indian stock market; Call and Put options. The investors go for these two types of stock options trading to buy or sell options.
The details about these Call and Put types of stock options trading is as follows,
1. Calls: In the Call options Contract, the owner has the authority to buy the underlying asset in the future period at some agreed price. The owner does that when he is confident that the value of the underlying asset will probably rise in the given period. Call contract has an Expiry date, and the owner is supposed to buy the asset on or before that Expiry date.
2. Puts: This put options is quite the opposite of calls. The owner of the put has the authority to sell the assets in the future period at a pre-fixed price. So, if the owner feels that the value of your asset might go down in a short time, then the owner decides to buy a put option. Here, he can sell his asset without bearing much loss or minimal loss.
The options trading categories in stock market include the aforementioned American Style, Exchange trade options, European Style, Over-the-counter options, Options trade by expiration, Employee stock exchange, Cash Settled options, Options type by underlying security, and Exotic options. Only If the Investors know about the categories in detail can they use them for their benefit.
Summary
Out of many available options trading categories in stock market, the investors need to choose the best, and they can only do that if they have a clear idea about different types.
Investors choose Call options if they are bullish about a stock or index. In the call options, you as an investor will get a benefit when the price of stock or value of the index that you have bought at a specific strike price goes above the strike price,
Investors choose Put options if their bearish about the stock or index that they have bought at its strike price. In the put option, you will benefit when the price of the stock or the value of the index goes below the strike price of your stock or index.
As per the Indian stock market, this expiry date falls on the last Thursday of a month.
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